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Bric by bric -- How the world will change

October 16, 2003

Dreaming With Bric's: 'The Path to 2050' is the title of an excellent economic research paper released by Goldman Sachs in the first week of October.

The paper looks at the prospects for economic growth of the leading emerging market economies (Bric -- Brazil, Russia, India and China) and compares and contrasts this with the prospects of the G-6 (US,UK, France, Germany, Italy and Japan).

While most people are intuitively aware that the emerging economies of the world are growing faster than the developed world, this paper demonstrates how this growth differential will shift the balance of economic power.

The Bric's economies are likely to become a much larger force in the global economy much faster than most investors currently anticipate.

Using demographic projections and a model of capital accumulation and productivity growth, the paper models GDP growth, per capita income and currency levels for the Bric economies through 2050. These projections are made relative to similar economic projections being made for the G-6 and are all in US dollars.

Using the above, the paper delivers some startling forecasts.

The combined size of the four Bric economies is projected to exceed that of the G-6 in US dollar terms by 2039.This seems to be quite an ambitious forecast, given the fact that these economies currently account for only about 15 per cent of the G-6.

This catch up occurs most dramatically in the first 30 years and is driven by both faster economic growth and currency appreciation.

Within four years China will have overtaken Germany; Japan by 2015 and crossed the S by 2039 to become the world's largest economy (All in US dollar terms). Within thirty years India should have become the third largest economy in the world.

Of the current G-6 only Japan and the US will be among the six largest economies in the world in dollar terms by 2050.China will be the largest followed by the US, India, Japan, Brazil and Russia.

As early as 2009, the incremental growth in absolute US dollar GDP accounted for by the Bric economies will exceed that of the G-6. Thus the annual increase in US dollar spending power from the Bric economies will be greater than the G-6 within six years. If you were a global corporation which markets would you focus on?

Rising exchange rates will contribute significantly to the rise in US dollar GDP in the Bric economies. About one third of the rise in US dollar GDP of the Bric economies will come from appreciating currencies and two-thirds from faster economic growth. The Bric economies real exchange rates could appreciate by up to 300 per cent over the coming five decades.

Despite the faster growth, in per capita terms, the Bric economies will still lag the G-6 significantly.

Of course the key assumption underlying these forecasts is that the Bric economies maintain progressive economic policies and are able to develop economic institutions supportive of growth.

Each of the Bric economies faces different challenges, but the study highlights the growth potential, if suitable economic policies remain in force.

It is important to highlight also that the above forecasts do not assume any miracle-economy type of growth, but just that these economies remain on a steady growth track.

As for how plausible are these results? The study cross checks the results in three different ways, and even applies the same methodology to data beginning in 1960, to test how economic projections made then would have compared with subsequent reality over the 1960-2000 period.

All the checks seem to conform with the broad results.

The above forecasts clearly highlight the increasingly critical role emerging economies will play, and the need for investors/corporations to think through their long-term strategic positioning in these economies. The study has some specific lessons and implications for India as well.

As per the paper, among the Bric economies, it is actually India that has the potential to show the fastest growth over the next 30 and 50 years, not China. How many global investors/corporations today are willing to bet on this outcome? Not many is my guess.

In fact, by 2010 India should be growing faster than China with the growth differential only increasing over time. This is driven largely by the demographic dividend India is likely to reap over the coming decades, with a sharp surge in its working age population.

This is of course a two-edged sword, either we as a country create enough employment to absorb this huge surge in working age people and join the ranks of the global economic powers or we run the risk of falling into social chaos and anarchy.

In that sense, India's destiny will be made or broken within the next 30 years. The gainful employment of this demographic dividend, or lack of it, will determine the economic and social fate of our country.

India also has a poor record of delivering on its potential, historically. When the same methodology was used to go back in time and make projections for the 1960-2000 period to compare with actual performance, India fared poorly.

Instead of delivering GDP growth of 7.3 per cent per annum over the forty-year period (as predicted by the model), we only did 4.4 per cent. This gap was largely due to poor economic policy. We cannot allow this to happen again. We have already squandered our potential over the last 40 years, and to prevent this happening again, the pace and direction of economic policy reform must not let up.

The study also predicts real currency appreciation of near 300 per cent for India and China over the next 50 years (about 2.5 per cent real per annum). If this were to happen it would necessitate serious restructuring of the corporate sector in India.

We as a country have got used to constant currency depreciation and a permanent reversal of this trend will throw up some interesting challenges for the corporate sector. We are likely to see some unlikely winners and losers emerge from this appreciation at both a sectoral and micro company specific level.

Finally the world seems to be waking up to India's potential; witness the steady trickle of positive pieces on the country from both academic and financial researchers.

The country also seems to be regaining its economic confidence. We have many things going in our favour as well as many challenges. We must finally translate our potential into reality. No one will forgive us if we fail to do so once again.

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